Across personal and business arrangements, IOUs are commonplace worldwide. Explore the IOU in crypto alongside its traditional use by reading the concise explanation below.
What Is an IOU?
The term IOU is a shorthand way to acknowledge that one party owes something to another, whether noted informally on paper or agreed verbally between two parties. IOUs most often reference money, but they can also cover other assets, including goods or property.
Key Points and Limitations
An IOU functions mainly as a reminder rather than a legally enforceable contract. Consequently, it typically leaves out penalties for nonpayment and may not specify an exact date for returning the amount to the lender.
The details included depend entirely on the participants.
- Names and addresses of the parties.
- Outstanding sum.
- Other optional details.
With the rise of cryptocurrencies, tokenized versions have appeared. These blockchain-based representations let users create and exchange claims across networks with minimal friction.
An IOU token in the cryptocurrency context mirrors the role of a paper note by marking a debt relationship. For instance, if you lend Bitcoin to a friend, the borrower can mint an IOU token and send it to your wallet as proof. When you hand that token back or redeem it, you are requesting repayment of the Bitcoin you provided.
Because blockchain systems—and on some protocols, smart contracts—are highly flexible, issuing and transferring such tokens is straightforward for everyday users.
In a crypto IOU arrangement, the issuer is the party who creates the IOU and owes the underlying asset, while the holder is the party who receives the IOU and has a claim on that asset. The holder can keep the IOU as a receipt, transfer it to someone else, or redeem it according to whatever terms the issuer set.
- The issuer defines what the IOU represents (for example, a specific amount of a coin or a future token allocation) and creates the IOU token.
- The issuer transfers the IOU token to the holder as acknowledgment of the obligation.
- The holder may transfer the IOU token to another wallet, effectively passing along the claim.
- To redeem, the holder returns the IOU token to the issuer (or calls a redemption function, if the IOU is governed by a smart contract) and receives the underlying asset.
Redemption can be on-chain, off-chain, or a combination of both. On-chain redemption typically involves a token transfer back to the issuer’s address (or burning the IOU) followed by an on-chain payout from a contract or issuer-controlled wallet. Off-chain redemption usually means the platform or issuer updates internal balances (or runs a manual distribution) once the holder proves ownership and requests settlement.
Some IOUs trade with an “IOU price,” meaning the market price of the claim itself rather than the price of the underlying asset. That price is often influenced by counterparty credibility, collateral or reserves (if any), liquidity in the IOU market, fees, expected settlement timing, and uncertainty around final delivery. As a result, IOU prices can trade at a discount or premium versus the spot price of the underlying asset, especially when redemption is delayed or constrained.
In practice, IOU markets are most commonly seen on centralized exchanges during pre-listing phases or around special events where the final asset is not yet broadly available. Depending on the setup, IOUs may also change hands over the counter, via peer-to-peer transfers, or on decentralized venues if the IOU is issued as a transferable on-chain token. Examples of exchanges that have offered IOU-style markets at various times include Binance, KuCoin, , and Poloniex.
Examples of crypto IOUs include exchange-listed “IOU” markets for tokens ahead of launch or distribution (such as IOUs for new listings), as well as fork-related IOUs (for example, ETHW IOU markets that appeared before full spot settlement). IOU-like structures also show up in wrapped or receipt-style tokens where the token represents a claim on something held elsewhere, though the redemption mechanics can differ by design.
After an underlying token launches, settlement usually involves swapping the IOU claim for the actual token. On some platforms, conversion happens automatically by replacing IOU balances with the newly launched asset in user accounts. In other cases, the holder must actively redeem by delivering the IOU token back to the issuer and receiving the real token in return, subject to any timelines, limits, or verification steps the issuer requires.
Using crypto IOUs can have benefits, including flexibility in how obligations are represented, improved liquidity for otherwise illiquid or not-yet-deliverable assets, early access to trading and price discovery, and simpler transfer of claims between participants.
However, crypto IOUs also come with important risks and considerations. Counterparty risk is central: if the issuer or platform fails, delays, or refuses to settle, the IOU may become worthless. Legal enforceability can be unclear, especially across jurisdictions, and platform risk matters if redemption depends on an exchange’s internal ledger rather than a transparent on-chain contract. Before accepting an IOU, it helps to understand who issues it, what exactly it represents, how redemption works, whether any collateral exists, and whether there is sufficient liquidity to exit without large price impact.
A promissory note is typically a more formal instrument than an IOU, usually stating specific repayment terms (such as a due date, interest, and remedies on default) and often carrying clearer legal enforceability. By contrast, an IOU generally serves as a simpler acknowledgment of a debt and may omit critical terms, which is why it is often treated more as a record of an obligation than a comprehensive contract.
Common token standards make minting an IOU token a convenient way to track obligations in crypto.
- ERC-20 standard.
- BEP-20 standard.
- Other token standards.
Keep in mind, however, that just like classic notes, crypto IOUs generally do not carry binding legal power.
